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How to Prepare a Balance Sheet of a Company? (With Illustrations)

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Guide for Preparing Balance Sheet of a Company!

For example, an examination of the ledger accounts prepared shows that the following accounts still show some balance (whereas other accounts have been closed by transfer either to the Trading Account or to the Profit and Loss Account):

The accounts reveal either what C. Wanchoo possesses or what he owes on March 31, 2012. His possessions consist of Cash in Hand, Cash at Bank, Machinery, Furniture and Fittings and sums owing by customers, i.e., Sundry Debtors (all debit balances). He owes Rs 37,000 to Sundry Creditors (credit balance). Besides, his own investment in the business is Rs 1, 63,000 (Capital Account, credit balance). One can say that his business owes this sum to him.

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The position can be summarized in the following manner:

As the heading shows, the statement is called “Balance Sheet”. It summarizes on the one side—the right hand side—the assets of the business and, on the left hand side the liabilities of the business including what the business owes to the proprietor, viz., capital. The Balance Sheet, therefore, is defined is a statement summarizing the financial position of a business on a given date. As the student must have observed, the figures have been taken from the Trial Balance as adjusted by the Trading Account and the Profit and Loss Account. These two accounts between themselves show the profit (or loss) made which, naturally, is added to (or in case of loss, deducted from) his capital.

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A few points should be noted about a Balance Sheet. The first is that it is prepared as on a certain date and not for a period. The Balance Sheet is true only on the date concerned and not on any other day.Even a single transaction will change a balance sheet. In the above case, for example, on the 1st April, 2012 part of the stock in hand may be sold. This will mean that stock will be less, debtors or cash will be more and the capital will be affected by the profit or loss on the transaction.

The second point is that the total of all assets must be equal to the total of all liabilities (including capital). Since capital is nothing but difference between assets and liabilities to outsiders, it is easy to understand why the two sides of the balance sheet should agree. Normally, however, one does not determine capital by deducting liabilities from the total assets. One utilizes the figure which the Capital Account gives. It is a test of accuracy, therefore, that after entering the balance in the Capital Account, the two sides of the balance sheet should agree. This also flows from the principle of double entry.

The third point to note is that a Balance Sheet can be prepared only after the Trading Account and the Profit and Loss Account have been prepared. This is the reason why the term “Final Accounts” is applied collectively to the Trading Account, the Profit and Loss Account and the Balance Sheet. But the Balance Sheet is not an account and it does not have “Dr.” and “Cr.” sides. All the accounts which have not been closed by transfer to either the Trading Account or the Profit and Loss Account must appear in the Balance Sheet; otherwise, the two sides of the balance sheet will not agree and it will not reflect the correct financial position of the business.

Arrangement of Assets and Liabilities:

Assets can be put down in a Balance Sheet, in two ways—either in the order of liquidity (that is to say, in the order of the degree of ease with which they can be converted into cash) or in the order of permanence (i. e., in the order of the desire to keep them in use).

Various assets grouped in the two orders will appear as follows:

Some assets cannot be easily classified. For example, investments can be easily sold but the desire may be to keep them. Investments may, therefore, be both liquid and semi-permanent. The order of liquidity is generally used by sole traders and partnership firms. In the case of joint stock companies, the form of the balance sheet is laid down by the Companies Act. Liabilities can also be grouped in two ways—either in the order of urgency of payment or in the reverse order.

Apart from joint stock companies, which have to follow the form prescribed by the Companies Act, liabilities are generally shown in the order of the urgency of payment. That is why sundry creditors and promissory notes given are shown first, then come loan creditors (who generally have given an undertaking to wait for a definite period); the capital comes the last.

Classification of Assets:

Assets may be floating or fixed. Floating assets are cash and those assets which are meant to be converted into cash at the earliest opportunity. Examples are cash at bank, sundry debtors, stock of goods, etc.The term ‘floating’ is derived from the fact that such assets constantly change in value through transactions that are entered into. The figure of total debtors, for instance, changes from day to day.

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These assets are also known as circulating assets. Cash is also termed as a liquid asset. Fixed assets are those that are not meant to be sold but are meant to be utilized in the firm’s business.Examples are machinery, patents, buildings, and goodwill. Fixed assets can be further classified into tangible or intangible. Tangible assets are those which can be seen and felt, like buildings, machinery, etc. Intangible assets are those which cannot be seen, like goodwill. It will be noted that floating assets must all be tangible.

However, to classify assets into tangible and intangible is merely academic. A stock of unsalable goods is tangible but is useless. Another firm may be able to realize large amount of cash by selling the intangible goodwill.

Some of the fixed assets may be consumed up in the course of time. A mine, for example, will be useless when it has been fully exploited. Such assets are often called wasting assets. But strictly speaking, all fixed assets are wasting (with the exception of freehold land) as sooner or later the usefulness of these assets will be over. It may be wise, therefore, to stick to the main classification of Floating and Fixed Assets. Some “assets” are of no value; they are called fictitious. An example is Preliminary Expenses (expenses to establish a joint stock company).

Illustration 1:

The following is the Trial Balance of B. Govil on 31st March, 2012:

Taking into account into following adjustments, make the necessary journal entries, and prepare Trading and Profit and Loss Account and the Balance Sheet:

(a) Stock on hand on 31st March, 2012 is Rs 26,800.

(b) Machinery is to be depreciated at the rate of 10% and patents at the rate of 20%.

(c) Salaries for the month of March, 2012 amounting to 7 1,500 were unpaid.

(d) Insurance includes a premium of Rs 170 on a policy, expiring on 31st September, 2012.

(e) Wages include a sum of Rs 2,000 spent on the erection of a cycle shed for employees and customers.

(f) A Provision for Bad and Doubtful Debts is to be created to the extent of 5 per cent on Sundry Debtors.

Solution:

Note:

The student should prepare the ledger accounts and carefully note how the adjustments change the various accounts and how new accounts come into being.

The student must have noted in the working of the above example that:

(1) The figures appearing in the Trial Balance have been taken to either the Trading Account,

Or the Profit and Loss Account,

Or the Balance Sheet, and

(2) Figures arising out of the adjustments, that is, matters outside the Trial Balance, have been taken to two of the above three accounts or statements. For example, stock appearing in the Trial Balance has been debited only to the Trading Account, whereas the stock on hand at the end of the year has been put on the credit side of the Trading Account and also on the assets side of the Balance Sheet.

For correct working, the above points must be firmly grasped. Items inside a trial balance go only to one place (either the Trading Account or the Profit and Loss Account or the Balance Sheet). This is because for items appearing in the Trial Balance, double entry is already complete. Adjustments require double entry as yet and hence two accounts will be affected. These two accounts will go to two different places.

Work Sheet:

A summarized way of working out final accounts is to prepare what is known as a Work Sheet. It has a number of columns, a set of two for trial balance figures, another set for adjustments, a third set to show adjusted trial balance, fourth for the Trading Account, fifth for the Profit and Loss Account and the last set for Balance Sheet items. The difference in this working and the one already shown is only that of presentation.

Illustration 2:

From the following Trial Balance of A. Atmaram as at 31st March, 2012 you are required to prepare a Trading and Profit and Loss Account for the year ended 31st March, 2012 and a Balance Sheet as at that date, after making the necessary adjustments. Also give journal entries for adjustments:

Adjustments:

(1) Stock on 31st March 2012, was valued at Rs 94,600.

(2) Write off Rs 600 as Bad Debts.

(3) The Provision for Doubtful Debts is to be maintained at 5 per cent on Sundry Debtors.

(4) Create a Provision for Discounts on Debtors and Reserve for Discounts on Creditors at 2 per cent.

(5) Provide for depreciation on Furniture and Fixtures at 5 per cent per annum, and on Plant and Machinery at 20 per cent per annum.

(6) Insurance unexpired was Rs 100.

(7) A fire occurred on 25th Mach, 2012 in the godown and stock of the value of Rs 5,000 was destroyed. It was fully insured and the Insurance Company admitted the claim in full.

Illustration 3:

Mr. P. Patel carries on retail business and his trail balance on March 31, 2012 was as follows:

Prepare the Trading and Profit and Loss Account as on 31st March, 2012 and Balance Sheet as on that date having regard to the following information:

1. Sundry Debtors include an item of Rs 250 for goods supplied to the proprietor and an item of Rs 600 due from a customer who has become insolvent.

2. Provision for doubtful debts is to be maintained at 5 per cent of the Sundry Debtors.

3. One-fifth of the alterations to the shop is to be written off.

4. Goods of the value of Rs 1,000 have been destroyed by fire and the Insurance Company has admitted the claim for Rs 700 only.

7. An intimation from the bank that a customer’s cheque for Rs 1,000 had been dishonoured is still to be entered in the books.

Solution:

Note:

A point to note is that Depreciation, Prepaid Insurance, Rent Accrued and Outstanding Wages all appear in the Trial Balance. Therefore double entry in this respect has been completed already.

Hence, furniture and the liabilities in respect of rent and wages will appear in the Balance Sheet without any adjustment.

Notes:

(i) Goods destroyed by fire, Rs 1,000 are credited to the Trading Account. Out of this, Rs 700 are recoverable from the insurers and Rs 300 is a loss which is debited to the Profit and Loss Account.

(ii) Four months’ interest on the loan to D. Pathan is due.

(3) Sundry Debtors total Rs 41,000

Illustration 4:

From the following Trial Balance, extracted from the books of Lalubhai Ladakchand, prepare a Trading and Profit and Loss Account for the year ended 31st March, 2012 and a Balance Sheet as on that date.

Charge depreciation on Land and Buildings at 2½%; on Plant and Machinery at 10% and on Furniture and Fixtures at 10%. Make a provision @ 5 per cent on the Sundry Debtors for Bad Debts. The bank has intimated that a cheque for Rs 800 received from a customer has been dishonoured. The customer is in difficulties and it is expected that he would be able to pay 60% of the claims on him.

Carry forward the following unexpired amounts:

(1) Fire Insurance – 250

(2) Rates and Taxes – 480

(3) Apprentice Premium – 800

Trade Expenses amounting to 7 430 have not yet been paid. Wages include 7 500 spent on the installation of new machinery on 1st April, 2011. Allow 10 per cent interest on opening balance of Capital Account, ignoring drawings.

Solution:

Note:

A particular point to be noted in the above trial balance is that the closing stock appears in the trial balance itself, which means that the double entry is respect of it has already been made. (This is shown also by the Purchase Account being termed as adjusted).

The entry must have been as follows:

Stock Account Dr. 88,780

To Purchases Account 88,780

The opening stock also must have been transferred to the debit of the Purchases Account. The closing stock will appear in the Balance Sheet and not in the Trading Account. Opening stock will not appear anywhere.

Illustration 5:

From the following figures extracted from the books of N. Narayan, you are required to prepare a Trading and Profit and Loss Account for the year ended 31st March, 2012 and a Balance Sheet as on that date, after making the necessary adjustments:

Adjustments:

(1) Stock on 31st March, 2012 was valued at Rs 66,000.

(2) Wages Rs 4,600 and Salaries, Rs 3,600 were outstanding.

(3) Insurance prepaid was Rs 800.

(4) A new machine was installed on 31st December, 2011, costing Rs 14,000, but it was not recorded in the books and no payment was made for it. Wages, Rs 1,000, paid for its erection, have been debited to Wages Account.

(5) Loose tools were valued at Rs 5,600 on 31st March, 2012.

(6) Depreciate Plant and Machinery by 10% per annum; Furniture and Fixtures by TA per cent per annum, and Freehold Property by 2 per cent per annum.

(7) Of the Sundry Debtors Rs 600 are bad and should be written off.

(8) Maintain a provision of 5 per cent on Sundry Debtors for doubtful debts, and 2 per cent for discounts on Debtors and a reserve of 2 per cent for discount on Sundry Creditors.

(9) The manager is entitled to a commission of 5 per cent of net profits before charging such commission.

Solution:

Note:

In a question like the above, where a regular trial balance is not given, it is advisable to first make out a trial balance to be sure that there is no difference in books or to ascertain a figure that may be missing. A perusal of the figures given above shows that figure in respect of sales is not there.

This information has been ascertained by preparing the trial balance, as shown below:

Note:

(1) With Rs 600 to be written off as additional bad debts, the sundry debtors are reduced to Rs 26,000 on which Rs 1,300 would be required as provision for doubtful debts.

(2) Provision for discounts in required at 2% on debtors which are Rs 26,000; out of this, the Provision for Bad Debts will have to be deducted. This leaves the debtors at Rs 24,700 on which 2% comes to Rs 494.

(3) Besides Machinery standing in books at Rs 1, 00,000, there is another machine purchased for Rs 14,000 and installed on 31st December, 2011 at an additional expense of Rs 1,000. Depreciation, therefore, will be for full year on Rs 1, 00,000 and for 3 months on Rs 15,000.

(4) The value of loose tools at end is only Rs 5,600 and hence Rs 1,400 (the difference between book value and estimated value) is depreciation.

(5) Without considering the commission, the net profit comes to Rs 73,981. 5% of this is payable to the manager as commission.

(6) The Loan to D. Dass of Rs 40,000 carries an interest at 15 per cent. The interest is Rs 6,000 for full one year. As only Rs 3,000 has been actually received, one must provide for the remainder.

Illustration 6:

From the following balances extracted from the books of Mr. Yellow, prepare Trading and Profit and Loss Account for the year ended 31.3.2012 and a Balance Sheet as on that date:

(b) Rs 6,000 paid to Mr. Red against bill payable were debited by mistake to Mr. Green and included in the list of sundry debtors.

(c) Travelling expenses paid to sales representative Rs 5,000 for the month of March 2012 were debited to his personal account and included in the list of sundry debtors.

(d) Depreciation on furniture and fittings is to be provided at 10% p.a.

(e) Provide for doubtful debts at 5% on sundry debtors.

(f) Goods costing Rs 1,500 were used by the proprietor. Entry for it has not yet been passed.

(g) Salaries include Rs 12,000 paid to sales representative who is further entitled to a commission of 5% on net sales.

(h) Stationery charges Rs 1,200 were due on 31.3.2012.

(i) Purchases include opening stock valued at Rs 7,000 (cost price).

(j) Sales representative is further entitled to an extra commission of 5% on net profit after charging his extra commission.

(k) No depreciation need be provided for computer as it was purchased on 31.3.2012 and not put to use that day. [Adapted C. A. (Inter) May, 1991]

Illustration 7:

Mr. Farmer carries on business as a market gardener, preparing accounts up to March 31. Interest is allowed at the rate of 10 per cent on capital but not on the current account. The gardens are freehold but a separate office is rented. The Trading Account is to be charged by way of rent with an amount equal to interest at 5 per cent on the cost of the land, building and fixed equipment.

Other adjustments are as follows:

(1) Stock on hand on March 31, 2012 was valued as

Growing Crops and Produce Manures and Fertilizers Tools and Materials

(2) The Buildings Repairs and Depreciation Reserve is to be credited with an amount equal to 4 per cent of the cost of Buildings and Fixed Equipment, actual repairs, being debited to this Reserve.

(3) The book value of a motor vehicle sold was Rs 7,000 on March 31, 2011 and depreciation of vehicles is to be provided for at the rate of 20 per cent per annum on the written down value.

(5) The expenses (including depreciation, etc.) of running the vehicles is to be dealt with as to one quarter as carriage inwards and as to the balance as carriage outwards.

(6) Farmer charges a salary of Rs 12,000 per annum, which is to be apportioned as to two-thirds to the gardens and as to one-third to the office.

From the following Trial Balance, prepare a Trading and Profit and Loss Account for the year ended March 31, 2012 and Balance Sheet as on that date, taking into consideration the above-noted adjustments:

Of this, one-quarter, viz., Rs 10,350 is debited to Trading Account as carriage inwards and the remainder, Rs 31,050, debited to Profit and Loss Account as carriage outwards.

(2) Rent charged is 5% on total value of Freehold Lands, Buildings and Equipment’s. It is not paid to any outsider, hence, debited to Trading Account and credited to Profit and Loss Account.

Illustration 8:

Dhanvantari Health Hospital runs an intensive care unit. For this purpose, it has hired a building at a monthly rent of Rs 1 lakh. The unit has undertaken to bear the cost of repairs and maintenance itself. The unit consists of 50 beds but 5 more beds can be easily accommodated whenever the situation so demands at a charge of Rs 50 per bed per day.

It is revealed that during the year 2010-2011, that the unit had full capacity of 50 patients for 120 days only and the total hire charges for the extra beds incurred during these days totaled Rs 40,000 and the unit had an average of 40 bed occupied for another 80 days.

The unit has arrangement with outside specialist doctors who are paid fees on the basis of number of patients attended by them and the time spent by them; in the year 2010-2011, the total fees paid to them worked out to be Rs 2 lakh per month.

The other expenses for the year were as under:

The unit has recovered an overall amount of Rs 1,000 per day on an average from each patient. The cost of janitor and other services is variable as it is related to the number of patient-days. Prepare a revenue statement for the year ended 31st March, 2011 and indicate the profit per patient day made by the unit. Also work out the number of patient-days required by the unit to break-even. Pass journal entries for the next year if the unit receives a) donated medicines of Rs 2, 50,000 and b) medicines expenses of Rs 8, 50,000 for the year include medicines for Rs 50,000 received by way of donation. [Adapted C.A. (Final) May, 2000]

Solution:

Number of Patient-days in 2010-11:

Manufacturing Account:

A concern which manufactures goods would like to ascertain the cost of producing the total output. It will be realized that the ordinary Trading Account is not capable of showing up the cost of manufacturing goods, because (1) it deals with stocks (both opening and closing) of finished goods, and (2) some of the expenses connected with production, such as depreciation and repairs of machinery are usually debited to the Profit and Loss Account.

Some concerns, therefore, prepare a ‘Manufacturing Account’ to which will be debited all expenses incurred in the factory on the production of goods. The effect is that depreciation of and repairs to plant and machinery are debited to the Manufacturing Account and not to the Profit and Loss Account.

The total of such expenses adjusted for value of stocks of raw materials and of semi-finished goods will show the total cost of the output during the financial period. This figure is transferred to the debit of the Trading Account which will show the gross profit made in the usual manner. (Note—Finished Stocks will appear in the Trading Account and not in the Manufacturing Account.)

In a manufacturing concern, at any time there will be some unfinished or semi-finished work. This is called work in process or work in progress. It is an asset like stock of materials or finished goods.The value of work in progress in the beginning is debited to the Manufacturing Account as opening stock. The value of work in process is credited to this account, as closing stock, and then shown in the Balance Sheet. It is customary to show one figure for raw materials consumed. This is done by adding purchases to the opening stock of raw materials and deducting closing stock of raw materials therefrom.

Thus:

An illustration is given next to show how a manufacturing account fits in with the usual final accounts.

Illustration 9:

From the following Trial Balance prepare the Manufacturing Account, the Trading and Profit and Loss Account for the year ending 31st March, 2012 and the Balance Sheet as on that date: